Two trades to watch: GBP/USD, EUR/USD
Fiona Cincotta February 2, 2023 8:23 AM
GBP/USD rises towards 1.24 post-Fed & ahead of the BoE. EUR/USD rises above 1.10 with all eyes on the ECB.
GBP/USD rises towards 1.24 post-Fed & ahead of the BoE
GBP/USD is rising for a second straight session after the Federal Reserve rate announcement investors look forward to the BoE monetary policy announcement.
As expected, the Fed hiked interest rates by 25 basis points to 4.75%. Despite a relatively hawkish statement and Fed Chair Jerome Powell saying that more work needed to be done to rein in inflation, the market, instead, chose to focus on the fact that Powell said that he sees a clear easing of inflationary pressures and didn’t appear concerned by the recent market rally.
The market is now pricing in a terminal rate of 4.9% and a 0.5 interest rate cut by the end of the year, dragging the USD lower.
Attention Is now turning to the BoE, which is to expected hike rate by 50 basis points. However, given the three-way split in the previous meeting, a 25 basis point rate hike can't be ruled out.
A 50 bps hike would take the rate to 4%, its highest level since the 2008 financial crisis.
The Bank of England is also expected to release new projections, which could show a slight improvement thanks to falling gas prices and marginally better-than-expected economic data in recent weeks.
Should the BoE hint towards slowing the pace of hikes of, indeed, pausing rate hikes, the pound could give up some recent gains.
Where next for the GBP/USD?
GBP/USD has been consolidating above 1.23 since mid-January. The price trades above its multi-month rising trendline, its 50,100 & 200 sma. The 50 sma has crossed above the 200 & 100 smas in a bullish signal, and the RSI is supportive of further upside.
Buyers will look for a rise above 1.2450, the 2023 high, to extend the bullish run up toward 1.2650, the May high.
On the flip side, sellers could look for a move below 1.2270, the weekly low, to expose the 50 sma at 1.2190.
EUR/USD rises above 1.10 with all eyes on the ECB.
EUR/USD is rising for a third straight day and has pushed over 1.10 to a new 9-month high following Fed’s less hawkish-than-expected tone and as investors look ahead to the ECB rate announcement.
ASB is expected to raise interest rates by 50 basis taking the rate to 3%. In the December meeting, ECB president Christine Lagarde as good as confirmed that the ECB would hike interest rates by 50 basis points the coming three meetings. While this has helped to lift the euro, it was a less hawkish Fed that boosted the pair over 1.10, suggesting that the market has its doubts over whether the ECB will achieve all of those hikes at that magnitude.
The meeting comes after Eurozone headline inflation cooled significantly more than expected to 8.5% YoY in January, down from 9.2% in December. However, core inflation proved to be stickier than expected, unchanged at 5.2%
Where next for EUR/USD?
EUR/USD rose above 1.10 to a 9-month high, taking out resistance at 1.0935, which now provides immediate support and break out of the upside of the ascending triangle.
The RSI is on the brink of overbought territory and so buyers should be cautious.
A rise over 1.1030 the daily high could see bulls extend the run higher towards 1.11, the February 2022 low and round number ahead of 1.1185 the March high.
Sellers could look for a fall below 1.0935 and 1.0860 the lower band of the triangle. It would take a fall below 1.0815 to create a lower low.
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